China: A more visible growth slowdown - Nomura

Analysts at Nomura expect a more visible economic growth slowdown of Chinese economy after the 19th Party Congress, with authorities putting more importance on the quality, rather than the speed, of growth.  

Key Quotes

“Activity: We continue to expect a more visible economic growth slowdown over the next 12 months after real GDP growth slowed to 6.8% y-o-y in Q3 from 6.9% in H1 2017. The slowdown will be driven mainly by the cooling property sector and weakening export growth, in our view. Property demand is likely to shrink further as already-high property prices erode affordability and continued policy tightening may further curb speculative demand. Geopolitical uncertainties should continue to weigh on export growth, but the tensions in Sino-US trade relations appear to have abated after Presidents Xi and Trump met in Beijing in early November. We expect real GDP growth to ease to 6.6% y-o-y in Q4 2017 and further to 6.4% and 6.2% in Q1 and Q2 2018, respectively. In the longer term, we expect economic growth to slow further as the economy rebalances from the old investment-driven model to the one more reliant on consumption.”

“Inflation: The recent rebounds in PPI inflation seem to be largely over, in our view. We expect PPI inflation to ease in Q4 (5.3% y-o-y) from 6.2% in Q3 given a high base last year and the weakening outlook of investment demand. We also expect PPI inflation to moderate further in 2018 and 2019. We believe CPI inflationary pressures will remain benign this year but face upside pressures next year if core inflation continues to rise, food prices resume their climb or a pass-through from PPI inflation kicks in.”

“Policy: President Xi Jinping began his second five-year term as General Secretary of the Communist Party of China (CPC) in October. We expect more Xi-style policies and reforms to be rolled out, with an emphasis on supply-side reform, SOE reform, deleveraging the economy, anti-poverty and anti-pollution. We maintain our call for neutral and prudent monetary policy through 2018, and forecast only one 50bp reserve requirement ratio (RRR) cut in H2 2018 after the pre-announced targeted RRR cut comes in effect in January 2018. We view these RRR cuts not as an easing measure but one to offset capital outflows and maintain reasonable M2 growth. We expect fiscal policy to remain mildly expansionary in the quarters ahead.”

“Risks: We view the risks to our 2017 growth and inflation forecasts as balanced, but those to our 2018 forecasts are skewed to the upside – the economic slowdown could be more gradual than we expect if supported by solid global growth and resilient domestic demand, the latter possibly driven by resilient property bubble or slower progress on reforms.”